Re Allan Terry Cornwall Ex Parte: Kenneth Henry Whalan [1988] FCA 39 (26 February 1988)

FEDERAL COURT OF AUSTRALIA

Re: ALLAN TERRY CORNWALL
Ex parte: KENNETH HENRY WHALAN
No. 971 of 1987
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF SOUTH AUSTRALIA
Forster J.(1)

CATCHWORDS

Bankruptcy - creditor's petition - subrogation of the rights and remedies of the judgment creditor - indebtedness.

Bankruptcy Act 1966

Legal Practitioners' Act 1898-1987 (N.S.W.)

HEARING

ADELAIDE
26:2:1988

ORDER

A sequestration order be made against the estate of the debtor Allan Terry Cornwall.

The petitioning creditor's costs, including reserved costs, be taxed and paid in accordance with the Bankruptcy Act 1966.

Note: Settlement and entry of order is dealt with in Bankruptcy Rule 124.

Counsel for A.T. Cornwall : Mr R.S. Dickson

Solicitors for A.T. Cornwall : Aldermans

Counsel for K.H. Whalan : Mr R.J. Lindquist

Solicitors for K.H. Whalan : Barratt Lindquist

DECISION

Allan Terry Cornwall ("Cornwall") is a former solicitor of the Supreme Court of New South Wales. Kenneth Henry Whalan ("Whalan") was a client of his. Over a period prior to 1980 Whalan gave to Cornwall sums of money totalling $39,959 upon the clear understanding that Cornwall would invest the money on first mortgages. With the exception of $3,500 none of these principal moneys was ever recovered by Whalan who thus suffered a loss of $36,459.

2. A fund called the "Solicitors' Fidelity Fund" ("the Fund") is established by s. 46 of the Legal Practitioners' Act 1898-1987 (N.S.W.) ("the Act"). The Council of the Law Society had at relevant times delegated its power in relation to the Fund to the Management Committee ("the Committee"). A person who suffers pecuniary loss with respect to a "failure to account" may make a claim against the Fund. "Failure to account" is defined in s. 56(1) of the Act as follows:

"56.(1) In this Part, unless the context or

subject-matter otherwise indicates or requires -

'failure to account' means a failure by a
solicitor to whom section 52 applies to account
for moneys or other valuable property entrusted to
the solicitor, or to any partner, servant or agent
of the solicitor, in the course of his practice as
a solicitor (including any moneys or other
valuable property entrusted to him as a solicitor -
trustee), arising from any act or omission of the
solicitor or of his partner, servant or agent -

(a) with respect to which the solicitor or his
partner, servant or agent has been convicted
of any offence involving dishonesty; or

(b) which the council determines under subsection
(2) to be dishonest,

whether the act or omission occurred before or
after the commencement of section 5(k) of the
Legal Practitioners and Other Acts (Amendment) Act
1974;"

3. Whalan made a claim against the Fund on 4 June 1980 and on 16 December 1980 the Committee resolved "the claim be disallowed as there is no evidence, at this time, of dishonesty on the part of Allan Terry Cornwall". Section 56(2) of the Act is as follows:

"(2) The council may, for the purposes of
paragraph (b) of the definition of 'failure to
account' in subsection (1), determine whether an
act or omission is or is not dishonest and that
determination shall for all purposes of this Part
be final and conclusive."

4. In 1983 Whalan instituted proceedings against Cornwall in the Supreme Court of New South Wales to recover the money owing to him by Cornwall. On 13 December 1985 judgment in those proceedings was given in Whalan's favour against Cornwall for $36,450 together with $29,706-75 for interest, a total of $66,156-75. It seems to me probable that the $36,450 should have been $36,459 but the discrepancy of $9 is not significant.

5. Execution issued against Cornwall, who had moved to South Australia, under process of the Local Court of Adelaide presumably following registration of the New South Wales Supreme Court judgment in that Court. The writ of execution was returned unsatisfied on 29 January 1987 and on 2 June 1987 a petition was presented to this Court in Adelaide asking for a sequestration order based on the act of bankruptcy in s.40(1) (d) (ii) of the Bankruptcy Act 1966 "execution has been issued against him under process of a court and has been returned unsatisfied".

6. On 9 July 1987 the Committee resolved as follows:

"(a) the resolution of the Committee made on 16
December 1980 be and is hereby rescinded

(b) pursuant to section 56(2) of the Legal
Practitioners Act the Committee determines
that Mr Cornwall's conduct was dishonest."

On the same day the Committee resolved to admit Whalan's claim against the Fund for a total of $67,337-63 which sum was paid to Whalan on 21 August, 1987.

7. Since payment by the Committee the proceedings under the bankruptcy petition have been carried on by the Law Society of New South Wales which purports to act pursuant to s.61 of the Act which is as follows:

"61.(1) Subject to subsection (3), on payment out
of the fund of any moneys in settlement in whole
or in part of any claim under this Part arising
from the act or omission of a solicitor or of his
partner, servant or agent, the Society shall be
subrogated, to the extent of the payment, to all
the rights and remedies of the claimant against
the solicitor, or the partner, servant or agent,
or any other person (including any person entitled
to administer the estate of any such solicitor,
partner, servant or agent who is insolvent or
dies) in respect of the act or omission.

(2) Where the Society is subrogated under
subsection (1) to the rights and remedies of a
claimant -

(a) the Society shall be at liberty to exercise
those rights and remedies in its own name or
the name of the claimant; and

(b) any moneys recovered by the Society in the
exercise of those rights and remedies shall be
paid into the fund.

(3) . . .

(4) . . ."

8. Notice of intention to oppose the petition has been filed by Cornwall on the following stated grounds -

"1. That the Judgment Debtor is not indebted to the
Judgment Creditor.

2. That the party carrying on these proceedings in
the name of the Judgment Creditor is not
subrogated to the rights and remedies of the
Judgment Creditor."

9. It is said that since the Law Society has paid out Whalan, Cornwall no longer owes him any money. Subrogation aside, I am disinclined to accept this contention, but I do not need to decide the point if the Law Society is subrogated to the extent of its payment to the rights and remedies of Whalan. In addition the evidence is that notwithstanding the payment by the Law Society there is still owing by Cornwall to Whalan the sum of $7,722-88 for interest upon the judgment. It is my view that Whalan is in any event entitled to a sequestration order on the basis of this debt of $7,722-88.

10. So far as subrogation is concerned the argument is that once the resolution of 16 December 1980 was passed the effect of s. 56(2) was to make the determination final and conclusive so that it could not later be rescinded or varied. The Legal Practitioners Act makes the payment of claims against the Fund conditional upon the loss being caused by a "failure to account" as defined, that is to say that the solicitor has been convicted or the Council or its delegated Committee has determined that the solicitor has been guilty of an act or omission which was dishonest. The argument runs that since the determination of 16 December 1980 that the act or omission was not dishonest was final and conclusive it was not open to the Council or the Committee to change its mind and resolve as it did on 9 July 1987 that the resolution of 16 December 1980 be rescinded and determine that Cornwall's conduct was dishonest. This resolution and determination are said to be void and ineffective, the payment to Whalan wrongly made and as a consequence it is said that no subrogation has occurred.

11. This argument appears superficially attractive but on closer examination proves to be unsound and I reject it.

12. The resolution of 16 December 1980 was that "there is no evidence, at this time, of dishonesty on the part of Allan Terry Cornwall". This resolution means what it plainly says that at this time the acts or omissions of Cornwall are not shown to be dishonest. The effect of s. 56(2) is to preclude the Council or the Committee from determining that on the evidence as at 16 December 1980 the acts or omissions were dishonest. Because of the insertion of the words "at this time" the effect of the determination is in my view limited which incidentally seems to me to have been the Committee's intention. Being limited in its terms and effect the determination does not prevent the Committee from passing the resolution of 9 July 1987.

13. I find that the resolution of 9 July 1987 was effective, that payment to Whalan was properly made and that the Law Society is to the extent of its payment to Whalan subrogated to all his rights and remedies and is entitled to continue the bankruptcy proceedings in his name. Cornwall's opposition in accordance with his notice fails and is dismissed with costs.

14. Being satisfied that the judgment debtor has committed the act of bankruptcy alleged and being satisfied of all matters of which I am required to be satisfied under the Bankruptcy Act I make a sequestration order with respect to the estate of Allan Terry Cornwall and order that the costs of the petitioning creditor including the costs of the objection be taxed and paid in accordance with the Bankruptcy Act.